By now, most Stansberry & Associates readers are familiar with Royal Gold (RGLD)… It’s one of the world’s best, most diversified ways to profit from rising gold prices.
Royal Gold is a royalty company… And it could easily rise 120% in the next year or two.
Here’s why…
Rather than owning its own gold mines or conducting exploration programs, Royal Gold helps finance mining companies… and earns a “royalty” on their gold production.
Royal Gold doesn’t take on typical gold company risk, like an unsuccessful drilling program or problems with a single mine. Royal gold collects royalties on more than 20 producing mines… and has more than 20 other projects in the works.
This “fingers in many different pies” business model makes Royal Gold a diversified and leveraged way to play rising gold prices. You can see the success of this model in the chart below. Royal Gold shares are up 85% over the last two years.
But my colleague Steve Sjuggerud and I agree – this run isn’t over. Royal Gold still has big gains ahead of it. Here’s why…
Last year, Royal Gold generated revenues of $216.5 million from its royalty portfolio. Royal Gold’s production is diverse… But 64% of its revenue came from gold royalties.
[ad#Google Adsense 336×280-IA]What’s incredible about Royal Gold’s business is that it converted 68% of its revenue to cash flow. That’s a big profit margin… and why investors love Royal Gold. Right now, the company trades at nearly 27 times cash flow. That’s low for Royal Gold. Its average over the last five years was 37 times cash flow.
That’s important to the rest of the story: How Royal Gold will soar in value this year.
The price of gold is up almost 50% over the past year. Today, it’s trading around $1,800 per ounce. That’s 33% higher than Royal Gold’s average price last year. If the price of gold remains at $1,800 per ounce, Royal Gold’s revenues will grow to $260 million.
That would put the company’s market value around $4.8 billion at the current price-to-cash flow multiple. That’s a 22% increase from today’s market value.
However, if the company trades up to its five-year average price-to-cash flow ratio, its market value would be $6.5 billion. That’s 66% above its current levels. And based on its gold production forecast, I still think that’s conservative.
Royal Gold’s gold production should grow this year. That leaves the door open for even greater revenues… with the potential for Royal Gold’s shares to rise almost 120%.
That means… on the most conservative basis… we could see Royal Gold’s shares rise 22% this year. However, if the stars align, we could see its shares more than double from here.
Gold looks due for a correction at these levels. And we can’t know if it will shoot up to $2,000 an ounce or sink to $1,750 an ounce [like it did yesterday]. I’m simply laying out a “great case” scenario here. Should it happen, Royal Gold shares could rise another 120%.
Good investing,
— Matt Badiali
[ad#jack p.s.]
Source: The Growth Stock Wire